Operational risk within investment management firms can stem from many sources. Firms also have varying tolerance levels for accepting or handling such risk. SEI believes virtually every firm can benefit from taking a fresh look at common areas of risk and consider the variety of relatively straightforward risk management measures that can readily be deployed. In that spirit, SEI put together a 10-part guide as an effective risk management tool to set the foundation for operational excellence. Below are excerpts from chapters three and four, now available for download at www.seic.com/OpsSurvivalGuide.

3) NOVICES, APPRENTICES AND SOLOISTS: Inadequate Training or Cross-Training

The lack of sufficient staff training is so prevalent that it deserves focus as a prime area of operational risk.

Common pitfalls: Key-person risks abound in low-ranking, yet vital, positions and senior staff alike.  Other problem areas include small, specialized teams that work in isolation,  training efforts that are ad hoc rather than systematic, and individuals who assume sole responsibility for a function or relationship, often zealously guarding their “turf.”

What can firms do?

Firms can take advantage of an array of training resources and formats, including conferences, live and online classes, short courses, and internal “lunch-and-learn” sessions.  Other measures to consider include:

Customized on-site training – This can be provided by internal experts and/or external specialists who can tailor training to the firm’s methods and requirements.

A well conceived set of do-it-yourself training efforts – Quiz staff on what they should have read in the firm’s compliance manual or code of ethics. Review system access capabilities. Ask people to describe what they do—and really listen to their answers.

Job rotation, job shadowing and job swaps – Such arrangements can help ensure that cross-training takes place, especially if accompanied by presentations on systems architecture and workflows.

Shared workflows – Ask teams to document or review their workflows and share them with other teams.

Webinars, industry conferences and networking – Attending such events can be helpful to many employees, particularly those who are knowledgeable in their jobs but would benefit from more exposure to other organizations.

Thoughtful attention to organizational design, training and cross-training can promote teamwork and reduce key-person risk at all levels.

4) DROPPED BATONS: Information Hand-offs

Investment management entails many complex sequential activities involving transfers of information between people, departments, organizations and systems.  These information handoffs are fraught with communication and timing challenges.

Common pitfalls:

Thinking in terms of the old paper-ticket system is a good way to starting addressing information transfers.  Other trouble spots involve hand-offs among electronic systems. Problems may stem from poor planning in the original system design, inadequate vendor support or spotty documentation.  Many interfaces suffer from more than one of these problems, and operational risk increases geometrically as more interfaces are involved.

What can firms do?

Thoroughly mapping where interchanges occur is the first step to lowering the risks of error—and don’t forget interactions with clients.

Diagram workflows – This is the most useful tool for identifying trouble spots in hand-offs between people and systems, including interfaces between teams or departments and between the firm and external counterparties, service providers and clients.

Develop a comprehensive inventory of what could go wrong – Assessing the risks and potential damage associated with potential error will help focus efforts to mitigate risks.

Build processes and protocols to mitigate the risks – In some cases, a quick fix may be sufficient.

Examine hand-offs to and from outsourcing service providers – Each hand-off should be covered by a service-level agreement with specific deadlines, quality expectations and metrics that provide benchmarks for evaluating performance.

Once investment managers have considered where operational processes might go wrong, they can take systematic steps to reduce or eliminate their risks.